The majority's bad policy choice is more important than the flaws in its reasoning. This attempt to punish unscrupulous insurers will undoubtedly lead to the punishment of many honest ones. Under today's opinions, juries will decide whether claims should have been paid more promptly, or in larger amounts; whether an insurer who failed to pay a claim did so to put pressure on the insured, or from legitimate motives, or from simple inefficiency; and whether, and to what extent, the insurer's slowness and stinginess had consequences harmful to the insured. All these very difficult, often nearly unanswerable, questions will be put to jurors who will usually know little of the realities of either the insured's or the insurer's business. The jurors will no doubt do their best, but it is not hard to predict where their sympathies will lie. The result of the uncertainty and error that the majority's opinions will generate can only be an increase in insurance premiums. That is the real "consequential damage" flowing from today's holdings.

The definitions and distinctions of and between "bad faith" and "breach of the covenant of good faith and fair dealing", between punitive damages and consequential, compensatory or extra-contractual damages, have never been murkier in New York. And they just became even murkier.

Bi-Economy and its companion decision, Panasia Estates, were about the recoverability of consequential damages under first-party property insurance contracts. What Judge Smith characterized in his dissent as the majority's conceptual errors in misusing the terms"consequential damages" and "covenant of good faith" have predictably resulted in the migration of Bi-Economy's arguably inexact and ambiguous holding into disputes over disability insurance, commercial general liability insurance, environmental contamination liability insurance, and homeowners insurance. See, the Bi-Economy label, this blog.

Is it any surprise then that Bi-Economy has burgled into no-fault? No.

This matter involved a denial of no-fault benefits based on a pre-operative IME and post-operative peer review. Plaintiff sued Hartford for breach of contract. Her suit included demands for non-economic damages for her alleged pain and suffering due to Hartford's refusal to pay no-fault benefits for surgery costs, and punitive damages. Hartford moved for summary judgment, presumably to dismiss all but the complaint's breach of contract allegations and related contractual damages claims.

Accepting plaintiff's argument that the rule of Bi-Economy can apply to no-fault claims, and without any analysis of whether the alleged extra-contractual and compensatory damages were within the contemplation of the parties at the time the contract was formed, Suffolk County Supreme Court Justice Sandra Sgroi denied Hartford's motion as to the plaintiff's extra-contractual and compensatory damages claims, but granted it as to the complaint's punitive damages claims.

The court's analysis is limited to following paragraphs:

In this matter, the allegations of bad faith or fraud are not pled in a conclusory fashion nor is the complaint insufficient to support any cause of action against The Hartford (see, Batas v. Prudential Ins. Co. of America, 281 A.D.2d 260, 724 N.Y.S.2d 3). There is no allegation much less proof that the Plaintiff has exhausted her no fault benefits under the contract of insurance issued by the Hartford and that this would justify a denial of benefits to the Plaintiff by the Defendant (see, U.S. Fidelity & Guar. Co. v. Pressler, 158A.D.2d 419, 551 N.Y.S.2d 921 order reversed by 77 N.Y.2d 921, 569 N.Y.S.2d 597, 572 N.E.2d 38). In light of the decision in Bi-Economy Market, Inc. v. Harleysville Ins. Co. of New York (supra), a recovery for compensatory damages may be viable. The Court will, therefore, deny the motion to dismiss the compensatory damages claim with leave to renew, if warranted, after discovery in this action has been completed.

* * * * *

While the allegations in the complaint and the affirmation of the attorney for the Plaintiff do not allege either “wanton dishonesty as to imply a criminal indifference to civil obligations” on the part of the Defendant or that the salutary purposes of New York Insurance Law Article 51 are in danger of being undermined by the actions of the Defendant as required to support punitive damages (4 N.Y. Pract. Com. Litig. in New York State Courts § 60:22), the complaint and the papers submitted as part of this record do support a finding that The Hartford’s conduct was possibly a breach of good faith and fair dealing.

Since the complaint together with the exhibits submitted on this motion do not support the claim for punitive damages, the motion to dismiss that demand for relief must be granted. A review of the record does however support the claim for compensatory damages and the portion of the Defendant’s motion to dismiss the claim for extra-contractual damages must be denied.

Noticeably absent from the court's decision are: (1) what definition of the "[covenant of] good faith and fair dealing" the court used in determining that there "possibly" was a breach sufficient to support an award of consequential damages; and (2) whether and how pain and suffering damages from a denial of no-fault benefits were within the parties' contemplation when the plaintiff's New York personal auto policy, with its prescribed no-fault endorsement, was issued.

Even the majority in Bi-Economy recognized that before consequential damages from a breach of contract are recoverable, "such unusual or extraordinary damages must have been brought within the contemplation of the parties as the probable result of a breach at the time of or prior to contracting" and that "[t]o determine whether consequential damages were reasonably contemplated by the parties, courts must look to the nature, purpose and particular circumstances of the contract known by the parties ... as well as what liability the defendant fairly may be supposed to have assumed consciously, or to have warranted the plaintiff reasonably to suppose that it assumed, when the contract was made[.]"

New York no-fault is a statutory creature. It's mandatory. It provides coverage for basic economic loss. Basis economic loss is defined by statute (Insurance Law § 5102[a]) and is limited to $50,000. Premium rates for no-fault are mandated. Unlike voluntary or optional insurances and endorsements and their "bargained-for benefits", all New York personal auto insurers must afford BEL coverage under a prescribed policy endorsement up to $50,000 per person. Insurers and persons covered under such endorsements contemplate nothing at the time of policy formation or inception. The New York State Legislature and Insurance Department did that for them.

Moreover, under the majority's opinion in Bi-Economy, only consequential damages that are quantifiable are recoverable under a breach of the covenant of good faith and fair dealing theory. Are non-economic, pain and suffering damages quantifiable? Not in the sense the Bi-Economy majority spoke, they're not. Awarding pain and suffering damages to someone whose no-fault insurer denied basic economic loss benefits will not "put that party in as good a position as it would have been in had the contract been performed", a necessary legal predicate for the recoverability of consequential damages. For that reason alone, Justice Sgroi erred in denying Hartford's motion to dismiss plaintiff's claim for such damages.

Much more will be written and said about this decision and its impact on no-fault claims handling in New York. Some already has over at The Rogak Report and No-Fault Paradise.

If the New York courts don't understand the import and scope of the majority's opinion in Bi-Economy, how will juries? Have we reached the point in New York where what once were distinct theories of recovery -- breach of contract, negligence, etc. -- have now melded into a "bad, bad insurance company" standard of recovery in all coverage dispute actions, regardless of the nature and pre-contemplation of certain potentially consequential damages? Judge Smith was so right.

14 comments:

One is almost forced to speculate, perhaps in that quasi-mystic state of mind which sometimes occurs when one awakes suddenly at 3:30 AM, that a group of litigation attorneys who are secretly Druids performed a ritual dance around a fire under a full moon, and prayed to their sacred trees for prosperity. That prayer was answered by the Court of Appeals in Bi-Economy. What the Court of Appeals took away in Pommels v. Perez, they may now have given back in the form of "bad faith" first party litigation. And I put "bad faith" in quotation marks to indicate that it is a misnomer. It is not difficult to foresee that every first party claim denial will give birth to a "bad faith" lawsuit. At first, the primary beneficiary will be the defense bar, because I predict that most of these suits will fail. But like an asteroid striking the Earth, it is only a matter of time before a case with a perfect set of facts comes along -- some poorly-thought-out denial of benefits to some pathetically injured claimant -- and it will be like 24 January 1848, when James Marshall discovered the first flakes of gold at Sutter's Mill.

Pre-contemplation is a fancy way of saying what we learned in Law School Contract Class during our first year. Foreseeability. As I said: Is it forseeable that a denial of contractually mandated medical benefits will cause pain and sufferring -- or worse ... crippling and maiming and depression? It is simply that simple.

One cannot breach a contract simply because one has a pre-set 97% negative IME rate as does State Farm -- see the insurance department's own statistical analysis in my 78. (The Court has requested Oral Argument so there actually maybe a private right of action under the No Fault Law if not the No Fault Regulations)

Of course you have to prove it my friends. But you will have your day in Court to do just that. And how provable it will turn out to be.

Sure there are degrees of fraud or unnecessary treatment. They range from over prescribing -- which is hard to call fraud given medical malpractice suits -- to outright staged accidents. And insurance companies shouldn't have to pay for that although in reality they pay for nothing -- the premium payers pay for it.

But Insurance Companies better hire real SIUs and real doctors and do their job the right way -- the ethical and legal way -- instead of engaging in wholesale theft. This bandying about of the word "fraud" as insurance company profits rise even in times of Katrina and stock market crashes will need to be supported by real facts.

Roy my friend it's 1:22 a.m. I have to wake up early to coach soccer. But I'm not leaving the office just yet. You have helped me again by making some cogent arguments -- albeit I feel incorrect arguments -- against consequentail damages arising out of the breach of a no-fault contract.

Yes you have done this before Roy. Your savage attacks against my class action embarrassed me to the point where I became a better pleader. I will still make my pleadings read like a novel --but a shorter novel. (You should not abandon style -- most pleadings are so pro-forma they are boring) Most importantly I will painstakingly plead the elements.

Well off to Lexis and the rudimentary elements of consequential damages.

But there is recovery for actual physical pain resulting from a breach of contract. One needs to go back to the seminal case of Boyce v. Greely Square Hotel Company 228 N.Y. 106 (1920). In that case an employee entered the room of a female guest and scared her into actual physical pain -- she couldn't eat or sleep. The Court equated the action to a breach of an implied contract and stated that the award of consequential damages for physical pain was proper.

Well this brings us to of all places Judge Diane Lebedeff (currently of Queens Civil No Fault fame and no friend of the Plaintiff provider) and the decision in Stone v. Continental Airlines, 10 Misc.3d 811 (NYC Civ. Ct. NY Co. 2005). Passengers were bumped from flight. Cause of action for breach of contract upheld. Consequential damages for inconvenience, delay and uncertainty awarded. It is a well reasoned opinion.

Thank you for your input and third shift legal research. I coached soccer for many years when my sons played. Miss it.

Lebedeff's decision is an interesting one. With hat tip to you, I'm gong to post about it in relation to the "what damages can be consequential to a breach of contract?" question.

I understand that from time to time the courts may not get it right. I only want them to be thoughtful before deforesting new territory. I think that's what we all want. Sgroi's decision just doesn't cut it, in my opinion. Pun intended.

Consequential damages for breach of contract and damages for breach of the implied covenant of good faith and fair dealing (bad faith) are distinctly different concepts, but both can lead to extra-contractual claims against insurance companies. Had the Bi-Economy majority opinion stayed away from bad faith, then Judge Smith's prediction may have proved less prescient. The well recognized common law requirements for recovery of consequential damages for breach of contract are very unlikely to be present in a no-fault claim. However, a first party commercial property claim is more likely to present the necessary elements for recovery of consequential damages. Consequential damages are compensatory, not punitive, and are recoverable in the absence of bad faith. Trial judges (and appellate court judges) should be able to control a jury's attempt to punish in the guise of overcompensating for consequential damages. The distinct theories of recovery can remain intact and not devolve to the "bad, bad insurance company" standard.

For the love of all things holy, can someone please explain to me the difference between a claim for "bad faith" and "breach of the covenant of good faith and fair dealing"?(Btw, judging from the typos and "legal analysis" in this opinion" I would not be surprised if a clerk authored the opinion

"Bad faith" is not the issue. In fact it is confusing the issue immensely.

The issue is what damages would logically and foreseeably flow from a breach of contract at the time said contract was entered into. It is that simple -- a very simple concept. Is it foreseeable that the failure to provide treatment -- by refusing to pay for it -- will lead to a worsening physical condition. Absolutely.

Now an insurance company under a no fault contract and the law from which said contracts are born has an obligation to pay absent a fraud or lack of coverage. If it is found that the insurance company breached its contract then there is in most circumstances an inherent bad faith. Why? They should have paid but consciously decided not to.

It is hard to say we negligently failed to pay. Perhaps they can say we were misled by this particular IME doctor. But I worked for an third party administrator of insurance companies for two years as a high level executive no less. And that would be B.S.

Whatever the reason -- "bad faith"; absence of good faith or negligence -- if they breach and the consequence of that breach is a worsening of the condition then they have to make good. That much I think is definite.

Extra physical pain and suffering but things work out -- that's another degree but I believe it would fit into the analysis.

The Court's are always constrained when it comes to so called anguish.

In the end it will come down to the battle of the experts. Would treatment have helped. Folks I'll go on record and say that a lot of treatment I think does not help. But when you cut off real physical therapy (like theraputic exercise) and a surgery -- especially an important surgery; well that's thin ice.

Finally on the fact patterns I have the Rocanova level of public harm caused by the tort of fraud easily supports punitive damages -- so in many ways the issue is not as large.

Upon further reflection might the issue of damages be too speculative under most fact patterns. Not as far as contemplation but proof that the denial of treatment caused "pain suffering" or what I believe to be the gold standard -- a "worsened physical condition."

I think that you need a major injury in need of major treatment that was denied to have a case that would survive summary judgment.

Instinctively D.G. from No Fault Paradise hinted at this in his commentary. Plaintiffs should be careful because excesses that lead to Larry's flood gate can drive the Court's to kill the expansion into No Fault.

By the way my soccer team took a trouncing because their head coach was too tired to offer much in the way of coaching or encouragement. My poor son took a direct hit to the face. The fact that he stopped the goal was little solace to him -- he's five -- given the sheer number of goals that were scored and the bloody nose.

A few thoughts on the topic. This decision and others like it will prompt complete no fault reform in the state, but not anytime soon so don't panic. As premiums sky rocket based on the new exposure to insurers, the failing banking industry will be able to capitalize as people will need a cosignor to purchase an auto policy. Both plaintiff and defense lawyers will increase their net worths two to threefold. Job stability in the civil court system will become rock solid. And finally the no fault litigation handlers for the carriers able to weather the storm as insurers leave the state will have a steady stream of work for years to come. Who said Patterson wasn't creating jobs?

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Coverage Counsel is brought to you by the law firm of MURA & STORM, PLLC with a main office in Buffalo, New York. To contact us, call (716) 855-2800 or email Roy Mura, the editor of this blawg.

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